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Small exercise of vision contrary to that of the consensus

Investor pessimism is now at historically high levels. And it is not for less: if there are three things that scare money, they are a change in monetary policy by the Federal Reserve (towards a more restrictive position), an increase in inflation or a war. And now all three have come together.

But the more consensus there is in the markets about something, the more reason to try to identify what the vast majority thinks and, from there, make an effort and think just the opposite. And because? Well, because it has been shown that, at least in the markets, most are wrong more than right.

I can’t insert a chart here, but imagine one that overlays investors’ pessimistic peaks with one for the SP 500 Index. You’ll find that 80% of the times that investors were very bearish turned out to be excellent buying opportunities. What’s more: if you take the last 12 years, that figure is close to 100%, since, after those falls or corrections, the market recovered lost ground. And usually it only took weeks or months to wait, not years.

They will tell me that it would be if the long-term uptrend that started in 2009 continues. But it turns out that the consensus thinks it’s over. Well, more reason: put to be “opposite”, let’s start leaving open the possibility that we are facing a correction and not a bear market.

Photo: Photo: Reuters/Andrew Kelly Opinion
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Juan Gomez Bada

Before continuing I would like to clarify that I’m not saying the consensus is always wrong.. I also want to clarify that of the “contrary” approaches that I am going to mention below, there are things with which I agree and things with which I do not. I limit myself to exposing them and giving “opposite” arguments, you should be the ones who draw your own conclusions.

let’s start with inflation and interest rates. Just as a year ago there were very few of us who saw that inflation would not be temporary, now it is the majority who see the current high level of inflation as something permanent. The time has come to question it.

Playing devil’s advocate, one observes that the Federal Reserve has made credit in the US much more expensive than before and has only raised interest rates by ¼ point. And in my opinion this is not by chance: based on a smart communication policy, the Fed has managed to scare the bond market so much that the interest rate on loans in general (which are referenced to bond rates), has skyrocketed. The most striking example is in the 30-year mortgage loan, the most common in the US, which has gone from being 2.70% a year ago to 5% today.

Photo: Photo: EFE.
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JM/EH

So just based on scaring -in this the star is one of its members named Bullard -the Fed has achieved a considerable tightening of credit conditions, which makes the contrary investor think that maybe in the end it will not have to raise rates as much or in a way as aggressive as the market discounts.

And the sanctions? Indeed the boomerang effect of sanctions generates inflation, but the so-called “bottlenecks” (due to excess demand) come from before and have to do with the strength of the US economy, not with sanctions that Europe pays above all. If the communicative aggressiveness of the Fed is able to cool down the US economy, the Fed could gradually and moderately bring interest rates to around 2%, a rise that is not enough to cause a recession in an economy as strong as it is now. The US economy itself, contradicting the majority opinion of investors, whose fear of recession has led to rates of pessimism equivalent to those in 2008, in the midst of a financial crisis!

If the consensus is wrong, we would be facing a simple correction and, therefore, a buying opportunity. Even in bonds, where the interest rate on the 10-year bond has gone from the 0.50% of the pandemic to the current 2.80%. Because, furthermore, in the case of bonds, investor pessimism is the greatest since the 1990s, with an 8% drop in the Barclays Aggregate Index of American Bonds, which, from a contrary point of view, is a very favorable figure to invest. I clarify that I am referring to US bonds, since in Europe the ECB has not even begun to stop buying, while in the US the Fed is already reducing its balance sheet and has begun to raise rates.

Photo: EC
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Value added

The war in Ukraine is the other factor that brings the markets upside down. Given the 12% drop in the European stock market so far this year, the message is that most investors believe that the Eurozone will enter a recession shortly. But what if there was a ceasefire and a negotiation process will begin? In the short term it is impossible, true, and a ceasefire is one thing and the conflict as such, which will last for decades, is another, but what if Putin achieved what he calls his secondary objectives and decided to take a break?

If it is done with the Donbas and with the south of the Ukraine (exit to the sea), it could decide that it is the time to take advantage of your position of strength to negotiate. And in that case one of its conditions would be that sanctions be relaxed, something that European leaders will surely accept willingly. They have already realized that these sanctions do as much damage to the one who receives them as to the one who imposes them. That possible ceasefire / negotiation that right now rules out the consensus would generate a strong recovery in European stock indices.

There is more consensus right now in the market, but, in addition to the fact that we are running out of space, we are aware that the going against the majority is difficult and that is something to take that in small tacit ones. But, as Warren Buffett said, “remember that you will have to be fearful when others are greedy and greedy when others are fearful”

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